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Monday, May 5, 2008

The S&P 500 and all of the other benchmarks did great in April. But I do not see any fundamentals having changed since the Bear Stears collapse - except fed bailing out everyone left and right.

The stock market seems to be ignoring all the bad news in the economy. This is a different recession because unlike anyother, consumers have maxed out their credit. The availability of credit last few years was unprecedented. Now with credit shrinking, it's going to effect the consumers in a big way. Add to that higher oil prices and consumer is going to have a hard time keeping up with the spending of last few years. And consumer spending is 70% of the economy.

As we get deeper into the possible recession, the jobs market will worsen. Last weeks job report was better than expected but remember the report added 267,000 jobs based on BLS estimate. 267K jobs added sounds too high. I would expect that there would be a big revision downward next year when the BLS revises the data.

``It may be a suckers' rally,'' said Eveillard, who is based in New York. ``Investors want to believe. But if I'm right, then there's truth to the argument that this is the worst financial crisis since the end of World War II. The same kind of reflex is the wrong reflex.''

This is what I keep thinking about the most. Almost everyone has called this the worse financial crisis since the end of World War II. If that is true, than a mere 10% decline from the top does not seem like it's ennough.

``There are pockets in the marketplace that believe this is a sucker rally, and they're willing to pay a substantial premium for downside protection,'' said Robert Arnott, whose Pasadena, California-based Research Affiliates LLC oversees $26 billion. He said in December 2006 that a bear market was probable.

.......

``You're going to have further losses for the financial system and weakening of demand of employment, of earnings, of profitability that's going to push further down the stock market,'' said Roubini, who more than a year ago predicted a housing slump would drag the U.S. into a recession. ``This is a temporary, bear-market rally.''

I couldn't agree more. If we were closer to the end, then why did the fed have to add to TAF on Friday? The housing, which was the root cause, still has a long way to go before it bottoms out. And now we are going to be seeing more problems with other credits - including credit card and auto loans.

Gerard Minack, chief market strategist at Morgan Stanley's unit in Australia, says that's a mistake. The global economy will probably worsen, Fed rate cuts will be less effective than in previous periods and profit growth will disappoint, he wrote in a note today.

``We are in the midst of a bear market rally,'' Sydney-based Minack said.

When I look at the mortgage rates, they have not come down in tandem with the fed rate cuts. If inflation picks up, you are going to see an increase in mortgage rates. That would make the situation even worse. Which is why I thought Bernanke should have left the rates at 2.25%.